WSJD Live: A View From Investors

At a conference such as the Wall Street Journal's WSJD conference, one of the most interesting things is to hear from investors about where they think the opportunities lie and how the market for start-ups looks.

At a conference such as the Wall Street Journal's WSJD Live conference, one of the most interesting things is to hear from investors about where they think the opportunities lie and how the market looks for start-ups. At last week's conference, a number of well-known investors either described new markets emerging with new technology—from Bitcoin to biotech to direct sales in China—or dealt with the status of investing in a world with lots of "unicorns" (companies with a nominal value of $1 billion or more).

Benchmark Capital Investor Bill Gurley, general partner of Benchmark Capital (above), thinks the valuations of many of today's private companies are silly, dangerous and "unstainable." He stated that Silicon Valley and the press get it wrong when they celebrate these high valuations. Valuation is a measure of expected future earnings, not of the past, and high valuations make it harder, not easier, for a start-up to live up to expectations.

As an example, he cited WeWork, which leases office space to individuals and start-ups. It is now valued at much more than Regus, a public competitor that he said is twelve times larger.

He said every one of these private companies will be evaluated over time with greater scrutiny, and noted that "it's really easy to grow revenue if you can lose a lot of money." It is likely that new companies started today will face some sort of market correction before they go public or are acquired, so they should focus on product and customers, as well as on staying small and nimble. "We need to refocus on building sustainable business[es] that are profitable," he said. Benchmark is still investing, but only in early-stage series A and B rounds, revealing the company has had one of its slowest years in the past decade.

Gurley particularly railed against the notion that many private companies—including a number of the $1 billion "unicorns"—won't have to go public, saying that for most companies the IPO has to be the objective, as investors will want liquidity. He suggested that companies that don't want to be public should have a "liquidity discount."

Asked about the widely held perception that public companies have to take a shorter-term view, he said the advantage of super voting shares (such as those held by the founders at Google and Facebook) has taken that argument off the table. With very few companies doing initial public offerings and very few mergers and acquisitions of start-ups because of high valuations and money-losing operations, this has been one of the worst years for liquidity in the entire industry, he claims. The current valuations were "all on paper," he said. "Until you get liquid, it's all a myth."

Mark Cuban

Mark Cuban, the well-known investor and owner of the Dallas Mavericks, said the biggest issue in Silicon Valley is a focus on too many different metrics, rather than on sales. He said that "no company succeeds without sales," and that in the long run, that's what is most important.

He agreed that companies are delaying or not going public, and placed much of the blame on Securities and Exchange Commission regulations, saying we have "overregulation because the SEC to this day still can't do its job."

The regulators weren't paying attention to Enron, Madoff, or the Lehman Brothers situations when they should have been, he said, and the result has been laws such as Sarbanes-Oxley and Dodd-Frank. As a result, there are a lot of regulations hurting the ability of private companies to turn to the public market for more capital. He said that the NASDAQ can't keep the number of listings at its current levels.

Cuban is worried about the potential for huge volatility in the market, such as "flash crashes" and he suggested requiring investors to hold equities for at least one second to get rid of the "latency arbitrage" that he thinks helps make the markets less stable. He also said it should be easier to set up a business, and called for patent reform. He is not a fan of crowd-funded equity, and called it a "big rip-off."

As for his Dallas Mavericks, Cuban said technology has become an important part of the product, and said that the company is trying to measure everything. He hopes that biometrics would give enough information about players so that shooting guard Justin Anderson can play until he is 42 or 43.

Overall, Cuban came across as quite positive. He said that Shark Tank, the TV show where he appears as a judge, is "important because it makes business and entrepreneurship cool." When asked if the American dream is alive and well, he answered "abso-f***ing- lutely."

Google Ventures and XPRIZE

One of the most hopeful panels at WSJD featured Google Ventures CEO Bill Maris, and XPRIZE CEO Peter Diamandis, who discussed moonshots and how things are changing very quickly.

They agreed that while even five years ago driverless cars didn't seem possible, they now seem not too far away. This will reshape cities and habits they said, with Diamandis arguing that in 15 or 20 years, "the idea of putting a 16-year-old kid behind a 5000-pound piece of metal will seem ludicrous." But, he said, the bigger change will come from "virtual presence" where people will meet via virtual and augmented reality instead of spending time on the freeway or the subway.

That was only the start of their predictions. Maris, who has stated people may someday live to 500, now said he "was being conservative" with that estimate. While that may be far off, both talked about how just by distributing technology, we could double life spans in Western Africa (where they said the average life span is just 40, compared with 75-80 in developed countries).

Diamandis co-founded Human Longevity with human genome pioneer Craig Venter. The company is dedicated to mining data from the human genome, microbiome, and chemicals in the body, to try to understand why some people live longer than others. He said in the next five to ten years, we can unlock huge amounts of data we never had before to help predict diseases.

Maris said he expects that over the next 30 years, we'll see a revolution in health care as significant as Fleming discovering penicillin, as we move from an episodic system of health care, to understanding what is likely to happen in the future and prevent it. Joking about Back to the Future on its 30th anniversary, Maris said, "I would trade flying cars for that."

Diamandis noted that early adopters tend to get technology when it is expensive and doesn't work particularly well. The rest of the world gets it when it is cheaper and works better.

Maris said of such technology that "If it's only for rich white people in Silicon Valley, then we've failed." He said Google Ventures is focusing a huge part of its portfolio on life sciences. "There's a lot of talk of redistribution of wealth, but redistribution of health is more interesting," he said.

Another topic they covered was engineered food to help feed the planet. Maris, a vegetarian, said that if we can stop eating meat, there is plenty of food in the world. Diamandis noted that one-third of world's non-ice land mass is used for cattle and said, "that's crazy."

Bitcoin

Balaji Srinivasan, CEO of 21 Inc. and Andreesen Horowitz Board Partner, talked about the emerging market for Bitcoin, both as a financial instrument and as a protocol. He talked about how the Internet didn't take off until Microsoft built TCP/IP into Windows. "We think something similar will happen with Bitcoin," he said.

He was particularly bullish about using Bitcoin as a "micro-currency," saying that it could be used as an alternative way to pay for content, for search, for social information, or just about anything paid for with advertising today. We currently have an advertising medium between the client and the advertiser, and he suggested instead that micropayments could fill that role, creating a new kind of "freemium" content.

Asked about blockchain technology and whether it was more important than Bitcoin, he said Bitcoin remains the most popular app on top of blockchain technology, and likened it to the World Wide Web running on top of the Internet. He said that financial companies are building applications on private blockchains, which are effectively a new kind of database within a bank or a consortium of banks. However, just as intranet sites eventually connected to the Internet, he suggested that eventually these private networks would export their transactions to a public blockchain.

He said that this system is not ready to replace auditing, but effectively offers "triple-entry bookkeeping." Blockchain technology would lead to less betting on mortgages. He said the troubles of 2008 were based on paper documents that couldn't be inspected, but that with a security based on blockchain, these could be inspected at the lowest level.

Manufacturing and Selling in China

In another panel focused on investing and manufacturing in China. GGV Capital Managing Partner Jenny Lee talked about investing in China. She said the defining moments for China came in 2010 when the iPhone reached the market and when Tesla went public.

She claims Chinese start-ups tried to make an electric car for the equivalent of $10,000; five years from now the top car companies could be Tesla, Google, Apple, and Uber. (Consider me highly skeptical.) She said this is only possible because of new technologies, and talked about how in China you have 600 million users you can reach directly. She talked about having back-ends for design manufacturing and front-ends for selling direct.

Liam Casey, CEO of PCH, which manufactures products for start-ups and other companies, said we are now in a "prototype revolution" with advances in Arduino, Raspberry Pi, 3D printing, Linux, and Android making it easier for entrepreneurs to create prototypes of their products, rather than rely only on a slide deck. He noted how Chinese companies like Xiaomi and OnePlus sell direct to consumers from a single location, and said PCH tries to bring that model to start-ups and tech companies it works with. He shared this vision of direct selling, and also talked about "replacing inventory with data."

Overall, Lee was bullish about social apps, robotics, and the Internet of Things, while Casey talked about more sophisticated manufacturing and the connected self.

DST

DST Global Founder Yuri Milner, an early investor in Facebook, talked about how investing is now global. Milner was lucky to be able to invest in companies such as Alibaba, Twitter, Xiaomi, Airbnb, and Spotify, which he said came down in part to knowing a bit about social networks. He made his start building Mail.RU in Russia, and had Chinese network Tencent as an investor.

Milner talked at length about investing in companies that have no physical assets, just intellectual ones, and that it was all about the founder installing the right DNA in the business. He noted that he often invests late in the cycle, almost as a proxy for buying shares in a public company. His approach has been to give the founders his voting rights.

His biggest difference, he said, is to focus on a specific market, but be global about it. He travels constantly to see and keep in touch with his investments.

Milner talked about some of his non-profit work, such as creating the Breakthrough Prize, a $3 million award to celebrate science and intellectual achievement. Another project he funds aims to buy time on the biggest radio telescopes to look for artificial signals that could come from alien life, noting that "we have to appreciate the fact that the world is so much bigger than the Earth and the solar system."

Michael J. Miller's Forward Thinking Blog: forwardthinking.pcmag.com
Michael J. Miller is chief information officer at Ziff Brothers Investments, a private investment firm. From 1991 to 2005, Miller was editor-in-chief of PC Magazine, responsible for the editorial direction, quality and presentation of the world's largest computer publication.
Until late 2006, Miller was the Chief Content Officer for Ziff Davis Media, responsible for overseeing the editorial positions of Ziff Davis's magazines, websites, and events. As Editorial Director for Ziff Davis Publishing since 1997, Miller took an active role in...
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